Tariffs of the Last Century: The Lesson Trump Forgot

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"The undersigned American economists and economics professors urge that any measure that would involve a general upward revision of tariff rates be rejected. We believe that raising tariffs would be a mistake. Generally speaking, they would raise the prices that domestic consumers would have to pay. By raising prices, they would encourage concerns about the higher costs of undertaking production, thereby forcing the consumer to subsidize waste and inefficiencies in industry. A higher level of protection, such as that contemplated, would therefore increase the cost of living and would harm the vast majority of our citizens." And again: "There is already ample evidence that such action would inevitably induce other countries to retaliate by imposing retaliatory duties on our goods. There are few actions more ironic than that of the American government, which, on the one hand, seeks to promote exports while, on the other, by raising tariffs, makes exporting increasingly difficult." Finally: “We urge our government to consider the bitterness that a policy of higher customs duties would inevitably inject into our international relations.”

It is an appeal against the protectionist policy of the United States, signed by 1,028 economists, the most prestigious in the country . It seems to be directed against Donald Trump's duties, but in reality it is almost a century old: it dates back to 1930 and was aimed at the Smoot-Hawley Tariff Act, which takes its name from the Republican senator and representative who promoted it.

After a hundred years, Trump has achieved the same miracle: getting economists to agree, the professional category that more than any other has different ideas and argues about any topic. Winston Churchill said that "if you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three". Not on tariffs, since two hundred years ago when David Ricardo developed the theory of comparative advantage, it is one of the few topics on which there is consensus: opposition to tariffs - excluding bizarre characters like Peter Navarro, Trump's trade advisor - is almost unanimous. About three months ago, inspired by the letter of the 1,028 economists, Phil Gramm and Larry Summers published a similar appeal in the Wall Street Journal. They are not just any two economists, but two prominent exponents of the Republican Party and the Democratic Party. The first, Gramm, is a historic congressman since the Reagan era who later served as chairman of the Senate Banking Committee; the second, Summers, is a prestigious economist, former president of Harvard University, who was Bill Clinton's Treasury Secretary. The two, evoking the letter of their colleagues in 1930, with the same bipartisan spirit, asked the president of the United States to reconsider. At the time, however, President Herbert Hoover did not veto the law that "helped transform a stock market crash and a growing financial crisis into a global depression and triggered a global trade war that halved American exports and imports," write Gramm and Summers, recalling the crisis of 1929.

In fact, the Smoot-Hawley tariff has made the term “protectionism” a dirty word in the historical and political memory of Americans. Now the United States seems to have forgotten that lesson, especially Donald Trump’s Republican Party, which after that disaster paid a very high political price and which in the post-war period – especially under Reagan’s leadership – had positioned itself on a line that was deeply in favor of free trade. Trump’s Make America Great Again is above all a return to the great trade barriers, which the GOP supported in the 19th century and up until the Second World War.

In the 19th century, especially after the Civil War, tariffs were high and served two main purposes: to raise revenue for the federal government (because there were not many other taxes) and to protect certain industries from international competition. The two parties differed in their emphasis on one of these two purposes. The Democrats, supported by southern farmers, believed that tariffs should serve primarily fiscal purposes and should therefore be relatively low because the revenue came from the flow of imports. The Republicans, on the other hand, representing industrial interests in the North and Midwest, wanted high tariffs to discourage imports and protect domestic industry.

By the turn of the century, the situation had changed. American industry had become more competitive and it was the agricultural sector that was in trouble, especially after the collapse of raw material prices in the early 1920s. There were legislative attempts to introduce measures to support farmers, but President Calvin Coolidge vetoed them twice. How did the crisis of 1929 come about?

Coolidge's successor, Herbert Hoover, had been Secretary of Commerce and knew the importance of international trade for the American economy, but in his program he supported a tariff increase to help the agricultural sector. Hoover, however, pointed out that the increase in customs tariffs should not "neglect the general interests of the country as a whole, and those interests include our commercial relations with other countries. A protectionism that sacrifices a greater amount of employment in exports to obtain a lesser amount of employment from imports is obviously unwise." On this basis, that of a minimal review of tariffs, especially in the agricultural sector, the legislative work of Oregon Representative Willis Hawley and Utah Senator Reed Smoot began. In January 1929, a House committee began hearings on the tariff review, which lasted forty-three days during which 1,100 people were heard, who filled 11,000 pages of testimony collected in eighteen volumes, from the most disparate sectors. Each producer, seeing the clear political will to increase duties, asked to maintain the barriers or raise them in their favor. Each chapter of the legislation was examined, table by table, for each item of the thousands listed. In the end, in the first draft it came out that the average rate on imports would increase from 34 to 46 percent.

While the Senate was adjourned for November 1929, the United States was about to be hit by the most serious economic crisis in its history. At the beginning of 1929, the Federal Reserve - the main responsible for the Great Depression, according to the historical-economic reconstruction of Milton Friedman and Anna Schwartz - had begun to increase interest rates to curb the excessive growth of the stock market. But at the end of October the crisis broke out: on October 24, 1929, remembered as "Black Thursday", the price of stocks collapsed and what would be remembered as the Great Depression began. One of the worst calamities in American history. From August 1929 to March 1933, industrial production fell by 55 percent, GDP by 36 percent, unemployment went from 4.6 to 24.9 percent. In this context of financial crisis, at the beginning of 1930 the Senate definitively approved the Smoot-Hawley Act: a very long law, which reported duties on about 3,300 products, of which about 900 had undergone an increase in the rate. Many, starting with Thomas Lamont of JP Morgan, Hoover's advisor, tried to convince the president to tell the truth. But all the appeals, including that of a thousand economists, fell on deaf ears. And it was a disaster.

The increase in tariffs was not a response to the outbreak of the crisis, but the tail end of a protectionist policy conceived beforehand. Nor was the Smoot-Hawley Act, as is often thought, the cause of the 1929 crisis . It was simply passed at the same time as the financial earthquake. Certainly, however, the tariffs and the crisis fed each other. As Douglas Irwin, a leading scholar of the commercial history of the United States, recalls, during the Great Depression the volume of exports fell by 49 percent and that of imports by 40 percent in about three years. "The decline in trade was much greater than the decline in real GDP, which fell by 25 percent." So the tariffs aggravated the economic crisis, but the Great Depression in turn amplified the impact of the tariffs. Above all due to the effect of deep deflation which, by reducing prices, increased the real incidence of the tariffs on imports. “Import prices,” Irwin writes in his work Clashing over Commerce: A History of U.S. Trade Policy, “fell 18 percent in 1930, 22 percent in 1931, and another 22 percent in 1932, for a cumulative decline of 49 percent after 1929. The impact of deflation on tariffs allowed the average tariff rate on dutiable imports to rise to 53 percent in 1931 and 59 percent in 1932. The combined impact of higher legislative rates and deflation increased the average tariff on dutiable imports from 40 percent in 1929 to 59 percent in 1932, an increase of 19 percentage points. About one-third of the increase in the average tariff during 1930 was due to legislation and two-thirds to deflation.”

But the most disruptive effect was on trade relations between countries: after unsuccessful multilateral efforts to limit tariffs, including through the League of Nations, the protectionist turn of the United States triggered a wave of protectionism, including in direct retaliation, throughout the world . In the 1930s, barriers were raised not only in the form of tariffs, but also in the form of quotas, restrictions and licenses, which fragmented trade relations: between 1929 and 1933, global trade fell by 26 percent, largely due to protectionist policies, which also fueled a climate of opposition that later led to the Second World War ("a tariff war is not the fertile ground for the growth of world peace", was written in the letter of the 1,028 economists).

After World War II, U.S. trade policy changed completely. In fact, the new direction had already matured with the victory of Franklin Delano Roosevelt in 1932, which also brought about an institutional change. With the Reciprocal Trade Agreements Act (RTAA) of 1934, Congress – responsible for producing the Smoot-Hawley Act – granted the president the power to make agreements with other countries to reduce tariffs on the basis of “reciprocity”, without the need for parliamentary approval. Today, paradoxically, it is Congress that claims the powers to impose taxes to stem the abnormal increase in tariffs decided unilaterally by President Trump.

The Smoot-Hawley Act, aided by the 1929 crisis, also caused a political earthquake, which was reminded to Trump in recent weeks by libertarian Republican Senator Rand Paul, who is leading a battle against tariffs: “We have lost the majority in the House and Senate for sixty years,” Paul warned. In fact, in the 1932 elections, Willis Hawley and Reed Smoot, who had been in Parliament for about 30 years, also lost their seats. But, above all, that event produced a profound cultural change: in the post-war period, the reduction of tariffs and free trade became a national policy, a principle shared by Democrats and Republicans to pursue the objectives of economic growth, foreign policy and security of the United States. A policy that, moreover, produced enormous benefits not only for America, which led this process, but also for the rest of the world that since the post-war period has seen a progressive spread of democracy and expansion of economic growth.

“The answer to our trade problem is not to close markets, cut off imports, or collapse trade,” President Ronald Reagan said in a 1986 radio address to the nation on international trade. “We learned that lesson a half-century ago when we tried to balance the trade deficit by building a wall of tariffs around the United States. The Smoot-Hawley Act ignited an international trade war and helped plunge our country into the Great Depression.”

After another half-century or so, that lesson—so ingrained in American history and political culture—has been forgotten. The hope is that Trump’s tariffs will have less devastating consequences than they did a hundred years ago.

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